Personal Finance: Retirement expectations and strategies

With traditional sources of retirement funding in flux, including corporate pensions and Social Security, matters of personal finance are a growing concern for many of the 77 million or so baby boomers who are about to retire.

The “financial wellness” strategies that this concern spawns vary, depending on whether you are Black or white. In their Ninth Annual Ariel/Schwab Black Investor Survey, Ariel Capital Management L.L.C. and The Charles Schwab Corp. report that Black and white Americans differ in their expectations about retirement. While more Blacks than whites participate in employer pension plans and large numbers of both groups are concerned that these plans are in jeopardy, fewer Blacks than whites (26 percent versus 30 percent, respectively) say they are worried about their retirement, the survey says.

The 2006 survey of 500 Blacks and 500 whites earning more than $50,000 annually was conducted by telephone between April 26, 2006, and June 4, 2006, by Argosy Research. The margin of error is approximately 4.5 percent.

The poll finds that Blacks plan to retire earlier and are pursuing different strategies than their white counterparts for their retirement years, such as investing in real estate or opening a business. Investing in the stock markets continues to lag among Blacks. In fact, the percentage of higher-income Blacks with stock investments is trending downward, from a high of 74 percent in 2002 to 64 percent this year. The number of higher income whites with stock investments (83 percent) is virtually unchanged since 1998, the first year the poll was taken.

“The most important factor to take into consideration is that markets do not always go up,” says Mellody Hobson, president of Ariel Capital. “It is important to be patient and disciplined when investing and to diversify your investments to make sure you are able to maneuver the ups and downs of the market.”

Hobson notes that young professionals should start investing as soon as they begin to work. Investing early is an excellent way to make savings a habit and the best way to take advantage of the tremendous benefits of compounding, she says.

Banking on a Pension An important difference between Black and white retirement funding is that Blacks are significantly more reliant on employer pensions than whites. Of those surveyed, two-thirds of employed Blacks, compared to about half of employed whites, work for organizations with a traditional pension plan. This reflects the fact that far more Black than white employees surveyed (44 percent versus 25 percent) work for government, which is more likely to offer pension plans.

Although, almost 90 percent of both groups surveyed consider themselves “very responsible” for preparing for their own retirement, Blacks are more likely than whites to feel responsibility also should be shared by corporations (by a 38 percent to 25 percent margin) and by the government (by a 35 percent to 18 percent margin). Large percentages of both Blacks and whites (50 percent and 55 percent) believe corporate pension funds will no longer exist in a decade, but far more Blacks than whites (65 percent versus 37 percent) agree that “when corporate pensions go bankrupt, the government should be responsible for paying those people who were counting on their pensions.”

All else being equal, Blacks are twice as likely as whites to believe government and corporations bear significant responsibility for ensuring Americans achieve a comfortable retirement. “All across America corporate pension funds are being frozen and many government pension systems are underfunded,” Hobson says. “It’s a national crisis that will hit Blacks especially hard because we’ve all bought into the promise.”

Moreover, the solvency of the Social Security system—its ability to pay full benefits to retiring baby boomers and still be in shape to handle the retirement of subsequent generations—remains seriously in doubt. “Today the system is taking in more than it spends. If nothing is done in the meantime, that situation will be reversed around 2018—some 10 years after the oldest boomers turn 62 (the age of first eligibility for benefits),” declares an article in the April 2005 issue of the American Association of Retired Persons’ publication, AARP Bulletin.

Dreams of EntrepreneurshipDespite uncertainty in the pension world, Blacks are optimistic that they will retire early, with twice as many Blacks as whites hoping to retire before the age of 60. However, the survey suggests that for many Blacks, retirement is just the beginning of a new phase of work. While both groups have similar aspirations for retirement, such as maintaining their current standard of living and traveling more, almost three times the number of Blacks versus whites (29 percent versus 10 percent) say they plan to start a business after they retire.

“Post-retirement entrepreneurship is not a solid retirement plan,” says Hobson. “While starting your own business is an excellent and rewarding endeavor, there are many risks, especially in your retirement years, that make it a difficult and risky proposition.”

In addition, more Blacks than whites own real estate other than their home (42 percent versus 33 percent), and of these, more Blacks than whites (58 percent versus 48 percent) say they expect these investments to help fund retirement. Furthermore, more than twice as many Blacks as whites (34 percent versus 16 percent) say they are currently saving to buy real estate, start a business, or both. “Black baby boomers can and should take full advantage of retirement savings catch-up provisions. The greatest risk is sitting on the sidelines and waiting to invest. Additionally, they should take care of savings for their retirement first, then worry about their children’s education, as there are no scholarships for retirement,” Hobson says.

Family TiesBlacks contribute less to their retirement accounts monthly than whites. The median monthly contribution is $254 for Black employees, compared to $306 for white employees. When asked about other retirement savings outside of retirement accounts, the median amount for Blacks who have such savings is $36,000, compared to $75,000 for whites.

Blacks also have family issues that compound the gap. The survey found Blacks receive less financial support from their parents and carry heavier financial burdens related to aging parents, adult children and other relatives. According to the survey, 27 percent of Blacks versus 18 percent of whites have an adult living in their home other than a spouse. Only 21 percent of Blacks compared to 35 percent of whites have received an inheritance, and only18 percent of Blacks versus 34 percent of whites expect to receive one in the future.

Blacks who are concerned about saving for their children’s education or those who are worried about caring for elderly parents are considerably less likely to be saving even $100 per month for retirement. Blacks who have extended family living with them are much more likely than others to be worrying about their retirement. “An extended family is not so much a burden but typically a way of life for many African-American families,” Hobson concludes. “As such, it is extraordinarily important to have a plan and to start saving for retirement early. Often, families find themselves members of the ‘sandwich generation,’ having to take care of both their children and their parents at the same time.”